A competitive market is a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold. More precisely, the key feature of a competitive market is that no individual’s actions have a noticeable effect on the price at which the good or service is sold. Important to understand however, that this is not an accurate description of every market. Supply and demand model is a model of how a competitive a market works
• Five keys elements: The demand curve • Supply curve • The set of factors that cause the demand curve to shift and the set of factors hat cause the supply curve to shift o The market equilibrium, which includes the equilibrium price and equilibrium quantity o The way the market equilibrium changes when the supply curve or demand curve shifts Demand schedule ( demand curve The Demand Schedule and the Demand Curve Demand schedule – a table showing how much of a good or service consumers will be willing and able to buy at different prices.
Quantity demanded is the actual amount of a G%S consumers are willing able to buy at some specific price Demand curve – is a graphical representation of the demand schedule.
It shows the relationship between quantity demanded and price. Law of demand – says the higher price for a good or service, all other things being equal, leads people to demand a smaller quantity of that good or service. Shift of the Demand Curve Answer lies in crucial phrase – “all other things being equal” Change in demand – is a shift of the demand curve, which changes the quantity demanded at any given price Movement along the demand curve – is a change in he quantity demanded of a good that is the result of a change in that good’s price.
Five principal factors that shift the demand curve for a G & S: • Change in the prices of related goods or services • Changes in income • Changes in tastes • Changes in expectations • Changes in the number of consumers Two goods are substitutes – if a rise in the price of one of the goods leads to an increase in the demand for the other good. Two goods are complements is a rise in the price of one of the goods leads to a decrease in the demand for the other good.
When a rise in income increases the demand for a good – the normal case – it is a normal good. When a rise in income decrease the demand for a good, it is an inferior good. An individual demand curve – illustrates the relationship between quantity demanded and price for an individual consumer. Market demand curve is the horizontal sum of the individual demand corves of all consumers in that market. MODULE 6 Quantity supplied – is the actual amount of a good or service producers are willing to sell at some specific price. Supply schedule – shows how much of a good or service producers will supply at different prices.
A supply curve – shows the relationship between quantity supplied and price. Law of supply – says that, other things being equal, the price and quantity supplied of a good are positively related. Change in supply – is a shift of the supply curve, which changes the quantity supplied at any given price. Movement along the supply curve – is a change in the quantity supplied at any given price Economists believe that shifts of the supply curve for a good or service are mainly the results of five factors (may be more):
• Change in input Changes in the prices of related goods or services • Change in technology • Changes in expectations • Changes in the number of products An input – is anything that is used to produce a good or service Individual supply curve – illustrates the relationship between quantity supplied and price for an individual producer. An economics situation is in equilibrium when no individual would be better off doing something different A competitive market is in equalitarian when price has moved to a level at which the quantity demanded of a good equals the quantity supplied of that good.
The price at which this takes place is the equilibrium price, also referred to as the market-clearing price. The quantity of the good bought and sold at that price is the equilibrium quantity. There is a surplus of good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. Tax incidence Tax incidence • The division of the burden of a tax between the buyer and seller Buyers and Sellers pay tax When a good is taxed, it has two prices: • A price that includes the tax • A price that excludes the tax
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